Google claimed Verizon requested that it left Google Wallet off of the versions of the Galaxy Nexus, which could be a critical distinction – there’s a difference between banning and asking. Meanwhile, Verizon has explained that Wallet is not blocked, but rather turned off while Big Red and Google work on integrating it into secure hardware elements that Verizon requires in all of its phones.

Verizon could be trying to fit wallet into its future NFC payment engine, Isis, which uses SIM cards to authenticate transactions, unlike Wallet, which uses embedded security features in the phone. If that’s the case, Google could be cooperating with Verizon with the expectation that Wallet will be enabled on future Verizon phones – not just the Nexus. If that isn’t the case, though, then Google might be a backing away from the fight it started in 2008, giving in to the demands of one of its biggest customers for Android phones. It wouldn’t be the first time that Google has let its business considerations trump net neutrality principles.

What do you think? Should Google challenge Verizon, invoking the open access principles it fought so hard for in 2008? Or should it honor its customer’s request and continue to work with Verizon behind the scenes to get Wallet implemented? This is a simple three-question poll, but the issue is obviously nuanced, so feel free to chime in with your thoughts in the comments section.

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• 2012: the year of confusion for NFC payments

Now, while this might seem like head-scratcher or a disappointment, it’s just a reminder that this is where we stand in the NFC race. Don’t expect to see Google Wallet widely distributed on a lot of other carrier phones outside of Sprint until the launch of Isis, the NFC digital payment joint venture from Verizon, AT&Tand T-Mobile.

No incentive to open up

As I wrote about in my GigaOM Pro report (subscription required) last month, the Isis carriers have no incentive to let Google Wallet operate on their phones, at least until their own digital wallet platform launches next year. At that point, when the playing field is more level, that’s when you might expect Isis to open up their phones to Google Wallet. But prior to that, it could be a wait for Google Wallet to gain wider distribution.

Google’s Osama Bedier, head of payments, complained about this stalling tactic by Isis in an October interview with NFC Times, saying its “closed” approach could back fire:

“I can’t speak for those carriers, but it is not a winning strategy to try to block access anymore, although it may buy you a bit of time,” he told NFC Times. “They may try it, but it won’t last, and I hear from the carriers that they want to be open.”

Isis expected to launch in Q2 2012

Google launched its digital wallet in September with launch partners Sprint, MasterCard and Citibank. But while it’s said that Visa and American Express will now support Google Wallet, the company hasn’t been able to announce any other carrier partners or banks. Meanwhile, Isis is moving forward with plans to launch first in Salt Lake City and Austin, TX by the second quarter of 2012 before progressing to a larger nationwide roll-out. It’s gotten commitments from HTC, LG, Motorola Mobility, RIM, Samsung Mobile and Sony Ericsson, who said they will all launch NFC-enabled mobile devices that use Isis’ NFC contactless technology.

Mick Mullagh, the CEO of ViVOtech, a provider of NFC hardware and software, said next year would be more of a settling period as the players in NFC payments come together and sort out how they co-exist, a process that could extend into 2013. He expects the carriers to eventually support Google Wallet on their phones but likely only after Isis is in the market and the competition is more even.

“I think mobile commerce will be open once all the players are on an equal keel and then there will be collaboration and people will compete on the value of their services,” Mullagh told me last month.

Year of confusion

This is partly why I called 2012 the year of confusion for NFC payments in my Pro Report because a lot of these business relationships still need to be worked out. Everyone wants a seat at the table and it’s unclear how everything will work together.

As more competitors compete rather collaborate, it can also create confusion for merchants and consumers, who aren’t sure which digital wallet to support and how they might work together. This could mean trouble for other NFC digital wallets that try to access the NFC secure element on new NFC-equipped phones from these Isis carriers. But ultimately, Mullagh said he expects the payment players to adopt more openness and see the benefits of collaboration, which can help everyone move faster and push broad adoption of NFC payments. There is an outside chance that Isis’ partners could extend a ban on competing NFC wallets for some time though I do agree that it makes sense for Isis to relent at some point when it’s on firmer footing.

Isis executives have played up the open nature of their digital wallet and I think consumer and merchants will also push Isis to open up and allow Google to co-exist on their phones. But as we’re seeing here with the Galaxy Nexus, they’re in no hurry. It’s unfortunate because one of the reasons I wanted to buy the Galaxy Nexus was to use Google Wallet for myself on a daily basis. I can try to get Google Wallet to work on an unlocked GSM version of Galaxy Nexus. And perhaps I will be able to sideload the Google Wallet app on to the Verizon Galaxy Nexus though I’d feel more comfortable getting Verizon’s official support. It might still happen at some point but not until this posturing gives way.

UPDATE: Verizon said today that it is not blocking Google Wallet but needs to work with Google on the application because it accesses secure hardware inside the phone. It said that commercial talks are on-going. I hope this means that Verizon will implement Google Wallet quickly. But I’ll believe it when I see it.

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• The future of mobile: a segment analysis by GigaOM Pro

At the mHealth Summit in Washington, D.C., on Monday, Qualcomm announced the creation of a new division called Qualcomm Life — replacing its Wireless Health business – overseeing its new 2net mobile and cloud telemedicine platform. The heart of the system is the 2net Hub, a wireless gateway that can link to any wireless sensor or device through Wi-Fi, Bluetooth, Bluetooth Low Energy and ANT+, encrypt that data and send it securely to the 2net cloud.

Qualcomm's 2net Hub

The hub isn’t the only way to transmit that medical data, though. Medical devices with their own cellular radios can upload biometrics directly to the 2net cloud as can smartphones loaded with health monitoring apps. Qualcomm has designed APIs that hospitals, doctors and insurance companies can use to integrate 2net into their healthcare systems, allowing them to retrieve patient information as well as upload any medical data they have compiled. Qualcomm also announced that it is starting a $100 million fund, managed by Qualcomm’s venture capital arm, that will seek out and invest in other mobile health startups.

Verizon is also developing its own cloud-based platform to connect medical devices to a common diagnostic database working with Entra Health Systems. But Verizon’s big contribution to mobile health may lie in its ability to transmit massive amounts of information between doctors and their patients over a far-flung network. New tablet video chat and conferencing abilities paired with diagnostic sensors could be used to approximate the office check up, used for follow-ups after a procedure or a new prescriptions and even as a means of instant communications during minor emergencies.

While it’s easy to think of telemedicine being primarily a solution for the old and the infirm, it has the potential to target a much wider swath of the public. New wirelessly connected pill caps can remind patients to take their medication and even notify a doctor if a patient goes to long without popping a prescribed pill. New exercise and diet monitoring devices can deliver real-time information useful for preventative medicine and monitoring overall fitness (your doctor will know if you’ve been lying about that daily 3-mile jog). Plus, new wireless technologies could expand healthcare to areas where hospitals and clinics are few and far between. Verizon plans to expand its LTE network to rural areas through spectrum-leasing partnerships with small regional operators. A 4G connection might be just what the doctor ordered when it comes to delivering remote healthcare to traditionally underserved areas.

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“Any report that Verizon Wireless uses Carrier IQ is patently false,” Verizon Wireless spokesperson Jeffrey Nelson said in an email. In an email follow-up, spokeswoman Debra Lewis elaborated. “We did recently notify customers about new privacy programs; we were transparent about how customer information will be used and gave clear choices to customers about whether they want to participate in these programs,” she said (the privacy policy is here). “Carrier IQ is not involved in these programs.”

The recent discovery by Android developer Trevor Eckhart of Carrier IQ’s “rootkit” that tracks every action a user makes on Android phones has raised all kinds of questions about whether operators, handset makers and other wireless industry players are collecting reams of data on their customers. The app runs hidden and constantly at the lowest level of the Android operating system, apparently tracking every input. There seems to be no way of uninstalling or disabling it without installing a different version of Android; something most won’t know how to do. There’s even evidence of Carrier IQ code in the iPhone, though according the chpwn blog it appears to be disabled in newer iOS devices. Earlier, Kevin Tofel wrote about how to detect Carrier IQ on your rooted Android phone.

Verizon’s disavowal of the technology is significant because of the sheer volume of Android smartphones in its subscriber base. While T-Mobile USA was the first operator to launch an Android device, Verizon became a heavy backer of the Google platform as it sought to counter AT&T’s initial U.S. monopoly of the iPhone. At the end of the third quarter, Verizon had 33.6 million smartphone subscribers, the large majority of which use Android devices.

We queried the other three national operators as well, but are still waiting to hear back from them. We’ll update you as soon as we hear, though. Meanwhile, a Rogers spokesperson posted on Twitter that the Canadian operator did not have Carrier IQ installed on its customer devices. MocoNews reported that U.K. operators Vodafone (one of Verizon Wireless’ parents) and O2 both denied collecting any customer info with Carrier IQ, while both Nokia and Google said that did not use Carrier IQ’s software on any of their phones (which in Google’s case means Nexus devices; not all Android phones).

Image courtesy of Flickr user kreg.steppe

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So what happens in the aftermath? Every operator would have a different take depending on what side of the AT&T-Mo battle lines they stood and their relative position in the mobile market. Here’s our take on who would win and who would lose:

AT&T: Back to the status quo, though with a few bruises

It may seem obvious that AT&T loses if its blockbuster acquisition fails, but AT&T isn’t as bad off as it claims. It would still be the country’s second largest operator in terms of total retail subscribers and mobile connections, and a big gap would still remain between itself and the next largest competitor Sprint. It still has every flavor of the iPhone still sold and still maintains a big advantage when it comes to new devices since it plays nicely with the dominant global GSM standard.

AT&T wouldn’t be able to piece together the massive 20 MHz-by-20 MHz LTE juggernaut it hoped to gain with T-Mobile’s Advanced Wireless Service (AWS) spectrum, but it’s still fairly well off spectrum-wise. Unlike Verizon Wireless, AT&T doesn’t have a uniform hunk of 700 MHz nationwide. It will have to put its LTE network together from the various AWS and 700 MHz licenses it holds around the country. But while Ma Bell may have lost out on T-Mobile’s spectrum goldmine, the FCC looks set to approve its purchase of Qualcomm’s 700 MHz licenses. Once LTE-Advanced comes along, AT&T can use new carrier-aggregation technology to shoehorn all of those disparate bands into one big network. That will put it in much the same position as Verizon, either forced to go get new licenses at auction, through smaller acquisitions or by re-farming its PCS and cellular frequencies for LTE.

The most lasting damage from the merger fallout to AT&T may be in public perception. In the last year, AT&T has become synonymous with the greedy expansionist corporation, whether it’s a fair criticism or not. Even if it decided to cut its losses and withdraw its merger petition completely, Ma Bell may not escape without incurring a few more bruises. Public Knowledge and the Media Access Project want the government to go in for the kill, petitioning the FCC to deny AT&T’s request to withdraw its merger petition. The two consumer interest groups argue that AT&T is gaming the system, withdrawing from a review process that could hurt its chances in the DOJ’s antitrust lawsuit. But Public Knowledge and MAP also want an evidentiary hearing, which would effectively air all of the deal’s dirty laundry.

T-Mobile: A carrier still in need of a new network

T-Mobile could come out of this smelling slightly sweeter than when it started. A failed acquisition means a big $3 billion payout for DT as well as the handover of $3 billion worth of spectrum to T-Mobile. That spectrum probably won’t be enough to launch a nationwide LTE network (if it were, AT&T wouldn’t need to buy T-Mobile’s spectrum,) but assuming AT&T does fork over some of its own AWS holdings, T-Mobile could build upon it to become a much stronger mobile broadband player, Current Analysis research director Peter Jarich said in an interview.

“T-Mobile could say ‘let’s double up on AWS,’” Jarich said. “’We get AWS from AT&T. Let’s spend that payout on more AWS licenses at auction. Then let’s use it to build a new network.’”

But that new network might not necessarily be an LTE one. If T-Mobile could only piece together new licenses in bits and pieces, it might be better off allotting that capacity to its current HSPA+ network, Jarich said. Only if it could clear out a sizable chunk of AWS nationwide would it make sense to launch LTE. Even then, it depends on the size of the chunk. If it can only launch LTE in a 5 MHz-by-5 MHz configuration—half the size of Verizon’s network—it gains very little in overall capacity. Why deploy two mediocre mobile broadband networks when you can deploy a single massive one?

Ultimately, T-Mobile’s decision may come down to DT’s future plans for its U.S. arm, Jarich said. If DT wants to pretty up the company for another potential acquisition or partnership, then keeping with HSPA+ would be the way to go. If DT believes that T-Mobile USA can make it on its own, Jarich said, then it must bite the bullet and get an LTE network built.

The Other Guys: It’s a toss-up

As I wrote about last week, Verizon’s position on the merger is complicated. The last thing Big Red wants is a merger to pass loaded down with regulatory requirements that will bite it in the rear when Verizon looks to consolidate its own spectrum position in the future. If the AT&T-Mo merger just disappeared, Verizon would be happy: no new regulations on the wireless industry, no definitive decision to deny the mega-merger, no harm, no foul.

Sprint, of course, would celebrate the failure of AT&T-Mo, but ironically it might have actually benefited if the merger went through. T-Mobile is Sprint’s biggest threat as its business model evolves to focus on prepaid and budget-minded customer segments. Sprint would be safe from the wireless duopoly it so feared, but it would have also missed an opportunity to lock down the low-end of the market that neither Verizon nor AT&T serves well.

MetroPCS and Leap Wireless would miss out on their biggest opportunity to expand for some time. Any AT&T deal with the FCC or DOJ would have required massive divestitures of markets and spectrum, all of which Metro and Leap could have picked up to either expand their footprints or add capacity to their CDMA and LTE networks. Also, Metro and Leap may have been secretly hoping that the deal had gone through. Both could have picked off T-Mobile’s former customers as AT&T delved into a long integration process.

Image of boxing winner courtesy of Flickr user superwebdeveloper

Image of T-Mobile lanyards courtesy of Flickr user Stefan Evertz.

Image of Verizon cone courtesy of (CC BY 2.0) Flickr user slgckgc

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Following the Federal Communications Commission’s decision to send the $39-billion proposed merger of AT&T and T-Mobile USA to an administrative hearing on Tuesday, AT&T has withdrawn its official application to combine its spectrum with T-Mobile’s. The company also said that it will take a $4-billion charge against earnings should the deal fall through. Both actions, which were taken on Wednesday, indicate that AT&T’s confidence in the deal is waning, and could be the final actions before a formal abandonment of the purchase.

AT&T still plans to fight the antitrust case that the Department of Justice has filed and has not said it plans to walk away from its deal just yet, but it clearly has realized that the forces arrayed against this combination will be hard to quell. As I noted on Tuesday, unless AT&T or T-Mobile pull the plug between now and then, the next big date should be the Department of Justice lawsuit hearing in February. From AT&T’s statement:

AT&T Inc. and Deutsche Telekom AG are continuing to pursue the sale of Deutsche Telekom’s U.S. wireless assets to AT&T and are taking this step to facilitate the consideration of all options at the FCC and to focus their continuing efforts on obtaining antitrust clearance for the transaction from the Department of Justice either through the litigation pending before the United States District Court for the District of Columbia, Case No. 1:11-cv-01560 (ESH) or alternate means. As soon as practical, AT&T Inc. and Deutsche Telekom AG intend to seek the necessary FCC approval.

The Department of Justice has come out against the deal, citing a lack of competition, while the FCC this week determined that the new entity wouldn’t create the jobs that AT&T has said it would, and in fact, would result in, “a massive loss of U.S. jobs and investment.” Since no one is buying AT&T’s and T-Mobile’s claims, perhaps the next big question is what happens next with T-Mobile. In the meantime, by taking a charge against its fourth-quarter earnings that reflects a $3-billion breakup fee and the $1-billion value of T-Mobile’s spectrum, AT&T is clearly prepping for trouble.

Given that the charge will occur before its day in court, I’m not sure if we should expect AT&T to walk before the close of this year, or if it’s just being cautious with Wall Street.

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The FCC could have required AT&T to divest spectrum and networks in numerous markets; FCC staffers had competitive concerns in 99 of the top 100 markets. It could have imposed deadlines for deployments and stricter requirements on the population and geographic areas those networks covered. It might even have dictated commercial terms on how it used that spectrum, spelling out the terms of data roaming agreements and maybe even imposing restrictions on what AT&T could charge for data service. All of these would have been anathema to Verizon.

Why? Because whatever restrictions and stipulations AT&T is forced to abide by if this merger goes through would return to haunt Verizon down the road. Verizon may be sitting pretty on a big fat LTE network today, but it readily admits it must go back to the market for more spectrum at some point. That means acquiring another operator, buying spectrum from a competitor or picking up new licenses at auction. Verizon may even weighing a bid on Sprint. Given the current regulatory environment, such a purchase would be out of the question today. But there are plenty of smaller players Verizon likely is eyeballing. Any future bid Verizon makes on a competitor or spectrum would be clouded by whatever requirements the FCC and U.S. Department of Justice would impose on AT&T-Mo today.

What’s Verizon really thinking?

Verizon’s official stance is that it’s “unopposed” to the merger so long as no new requirements are imposed on U.S. operators. Last week, at a Morgan Stanley investor conference in Barcelona, Verizon EVP and CFO Fran Shammo reiterated that stance: “There needs to be consolidation. And as long as there’s consolidation without regulation, we don’t have an objection to it.” (You can read the full transcript here).

A merged AT&T/T-Mobile would be a threat to Verizon just like it would be to Sprint. AT&T would gain enormous scale, and it could field an LTE network with twice the capacity of Verizon’s. Big Red has never lacked for confidence, though. It has no trouble competing against AT&T today when it has 100 million subscribers. What’s 34 million more that AT&T would gain from T-Mo? Verizon probably also feels it can take advantage of the inevitable chaos of a merger transition period to scoop up a lot of T-Mobile customers.

I think Verizon’s position on AT&T-Mo comes down to cold, hard Realpolitik: The enemy of my enemy is my friend. The biggest threat to Verizon’s future business isn’t AT&T; it’s the FCC and other regulators. Verizon’s interests are aligned with those of its arch-rival, but that doesn’t mean Verizon is supporting the merger outright. In fact, it’s playing a bit coy.

Verizon executives aren’t naïve enough to believe a AT&T-Mo could have flown through the FCC and DOJ unfettered. The public, political and regulatory outcry against AT&T guarantees that, if the deal were somehow to win approval, it would be loaded down with new regulations. Verizon’s aim was to minimize the damage.

The best outcome for Big Red

FCC Chairman Julius Genachowski

The FCC had three options: Approve AT&T-Mo outright, approve the deal with conditions or send it off to an administrative law judge for a hearing: the closest thing the FCC can do at this stage to denying the petition. The first option was off the table, so Verizon’s best hope was that the FCC and DOJ approve the deal with minimal requirements: some market divestitures here, some spectrum sales there.

Sending the merger review to an administrative hearing doesn’t bode well for AT&T, but it’s not an outright denial. AT&T can still save face by withdrawing its position. With no official decision made, there’s no precedence. AT&T would be free to try again with another potential acquisition, and Verizon could pursue its own consolidation agenda without a failed AT&T-Mo hanging over its head.

That doesn’t mean AT&T didn’t inflict any damage on Verizon. On Tuesday, FCC Chairman Julius Genachowski didn’t just recommend the commission shuttle AT&T-Mo off to an administrative hearing, he also circulated a draft asking commissioners to approve AT&T’s pending purchase of Qualcomm’s 700 MHz FLO TV spectrum “with conditions.” The FCC didn’t elaborate on what those conditions might be, but whatever they are neither AT&T, nor Verizon, is going to like them.

From Verizon’s perspective, the longer AT&T continues to press its case the more damage it can do. Verizon just wants this deal to die.

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In comparison, second quarter net postpaid adds increased 9.2 precent year over year – a quarter where there is traditionally no new iPhone to offer operators a bump, but this year was aided by Verizon’s snagging a CDMA version of the iconic device. The two major iPhone slingers didn’t do badly in the third quarter, but in UBS’ view their net adds were nowhere near the numbers either operator would have achieved if they had new iPhones to offer subscribers.

Verizon Wireless reported 882,000 net postpaid adds, while AT&T recorded 319,000, with a combined 4.7 million new iPhone activations between them.

That means the fourth quarter could be a bonanza for the wireless industry, combining the usual holiday craziness with the traditional third-quarter new-iPhone bump. UBS predicts a whopping 11.7 million iPhone activations between Verizon, AT&T and Sprint in the final three months of the year. That will result in 1.3 million total postpaid adds for national operators, up from 1 million in last year’s fourth quarter, UBS projects.

A lot of those customers will go to Verizon and Sprint – as the iPhone newbies – but UBS thinks the big winner will be AT&T. It will have the only “free” iPhone as the 3GS will be entirely subsidized with a two-year contract. UBS also believes that AT&T’s network will actually work for it rather than against it. The iPhone 4S has a 14.4 Mbps high-speed packet access (HSPA) chip tailor-made for AT&T’s network, compared to the slower CDMA EV-DO chips used to access Sprint’s and Verizon’s 3G networks. That may sound a lot of gibberish to the typical consumer, but AT&T merely has to say that its iPhone is faster than the others.

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Now a cohort of companies — most of them new entrants like Gigaclear and CityFibre — is trying to turn that around. But how do you do it?

“We’re focusing on London,” says Dana Pressman Tobak, the managing director of Hyperoptic, one of the companies leading the charge. “Our approach is to hit high density areas, start with multiple-occupancy dwellings and build up from there.”

This might seem obvious, but it’s not always the first strategy for British internet providers, who have traditionally focused on making sure they can get broad geographic coverage and scale. That approach has been partly pushed by marketing requirements, partly because it’s something that plays well with regulators, and partly because having a business you can defend means it’s important to get the largest customer base possible.

For example, as Om reported last week, local rival CityFibre is looking for $800 million to build out a large scale fiber network so that it can hit 1 million subscribers as soon as possible.

But Tobak says Hyperoptic is starting at the other end, with something that focuses on a small number of users and very specific areas like London’s East End — notorious for poor connectivity, despite being the heart of the English capital’s startup scene.

“People have looked for solutions that will work across the country, but as egalitarian as we would like to be, it doesn’t make it cost effective,” she says. “We’re focused on ‘notspots’, including south of the river, Westminster, Holborn and Covent Garden. There are definitely pockets, and we’ll extend from those.”

The focus on cost effectiveness means that customers lucky enough to live in a building served by Hyperoptic can get 1 gig download speeds for £50 a month ($80), with a typical £40 ($63) setup fee.

It may differ from rivals in this very limited approach — but the tactics doesn’t come from out of the blue, however. Hyperoptic is run by the same team that founded Be Broadband, a local provider that achieved industry-leading speeds before bought by Telefonica/O2 five years ago.

Very limited rollout was always part of Be’s gameplan — and gigabit fiber is, she says, what the business had always intended to do before O2 paid £50 million for it (around $90 million at the time).

But this relatively limited rollout doesn’t mean they aren’t planning to expand.

As well as adding a business-level product, by next year Hyperoptic hopes to start moving out of London into other large British cities — focusing again on large residential complexes which mean they can. And to get there, they also need money: while they’re self-funded right now, the company does plan on taking growth investment.

“The more we’re willing to finance, the faster we can go,” she says.

However, there is one thing that Hyperoptic won’t be doing: pretending it’s breaking new ground.

While Be was an exciting play in the market for its time, and something of a global pioneer, Tobak points out that the hullaballoo about gigabit speeds in Britain and America is hardly revolutionary. For every Atlantic provider that is trumpeting their high speeds, there is another in South Korea, Japan or Scandinavia for whom it is already the norm. Almost everyone is playing catch-up right now.

“I’m not going to pretend that technologically we’re doing something the world hasn’t done before,” she says. “But with a very small group of people we have made things happen.”

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The service will be priced competitively and will be built off an existing network in the U.S., most likely Sprint or Verizon. China Telecom operates on CDMA, the same wireless technology used for 3G by Sprint and Verizon. Tan said China Telecom has been in trials with different partners and expects to select a wholesaler soon. Users will get one line that works in the U.S. and one line that operates in China. Tan declined to provide more details about the upcoming service.

China Telecom’s initial bid may sound modest, but it could lead to a bigger play by China’s largest fixed-line provider and its third-largest mobile carrier. Tan said if all goes well, China Telecom may consider launching its own network in the U.S. instead of renting capacity from another operator. The company has $9.6 billion in total current assets, including about $4 billion in cash.

“If the service is growing fast, maybe we can set up our own infrastructure,” Tan told Bloomberg. “The money is no big problem for us.”

A larger infrastructure play could run into opposition in Washington, which is wary of China. The U.S. government recently blocked Chinese network equipment maker Huawei from taking part in a nationwide emergency network out of national security concerns. And foreign companies need to get an FCC waiver to own U.S. spectrum.

But first China Telecom has to prove it can make its MVNO work. Disney, ESPN and others tried and ultimately gave up after receiving little interest from consumers. SK Telecom, another Asian carrier, tried with Helio and ultimately sold to Virgin Mobile, which killed off the brand after being sold to Sprint.

The market for people who need and want phones that can operate both in China and the U.S. is specific but also limited. But Japanese telecom provider DoCoMo has also launched its own MVNO service earlier this year in the United States on T-Mobile, aiming at tourists. It will be interesting to see if these new efforts can make this model work or if it will ultimately follow in the footsteps of other MVNOs that gave up.

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After watching big companies aim products at the home consumer and talking to venture firms trying to see which business models might have the most success, the question seems to boil down to whether applications or hardware are better way to deliver connected home services? Fundamentally, every entrepreneur should realize that in a broadband world, what they will deliver is a service, and the rest is just the wrapping.

Hardware makes consumers happy

The Nest thermostat (in cooling mode).

Earlier this week, we saw the launch of Nest, a smart, connected thermostat, which is both beautiful and simple to use. All its complexity is hidden in the simplistic touch wheel design, but it aims to control the heating and cooling in your home in a manner that will save consumers up to 30 percent of their energy consumption. At $250, this isn’t a cheap thermostat, but what people are buying here is the intelligence that rests in the service (and a pretty thermostat).

A similar example is the Sonos system, which is awesome-sounding hardware that acts as a music delivery service. Again, the Sonos system isn’t cheap, but it does offer consumers aesthetically pleasing (in terms of sound, the boxes aren’t all that attractive) hardware with the true purpose of delivering music services from the web. The box is also easy to set up and manages to mask any problems with the quality of a user’s home Wi-Fi network, so the consumer doesn’t need to worry about allocating bandwidth to the box.

The list goes on with devices such as the Roku, which, like Sonos, is easy to set up and helps ensure a solid experience. And I can’t avoid mentioning Apple, which might be the king of building out hardware that hides its complexity and is heading toward becoming a means of delivering services such as iTunes, iCloud and MobileMe. It’s not quite there on the services side, yet, but I have no doubts it will get there.

The app-ortunity is unclear

Comcast's Xfinity app

While the app economy is huge on mobile devices, its ability to deliver services designed to be consumed at home are unclear. So far, apps designed to help consumers manage network-based services inside the home have faltered. On the energy management side, Google’s PowerMeter and Microsoft’s Hohm products were shuttered after low adoption. That may be a lack of interest in home energy monitoring, so we’ll have to see if Nest makes an impact where these services failed.

The television industry hopes to build apps for its screen, and pay TV providers are offering apps in the form of TV Anywhere products that might count as an example of success. But it’s hard to pinpoint specific apps that provide a connected experience tied to the home or gadgets residing in the home. I wonder if services such as security and TV apps might be the best way to hide a service in the form of an application.

With TVs and TV content, an app strategy makes sens,e because the content will come via IP to a multitude of devices from different manufacturers, (although for traditional TVs, a set-top box might work too). For security, which would require a professional installation of equipment (or people are more willing to buy professionally installed equipment) an app strategy may also work.

The other area where I’d love to see some sort of user-centric app or device is for managing the network. Right now, I don’t have the ability to easily allocate bandwidth to certain areas of my home or to certain applications. I think as more devices compete for limited Wi-Fi, such services make more sense. It could be built into a router or perhaps managed through the web via an ISP-provided app.

Either way, consumers are beginning to get frustrated with the toll of maintaining, updating, troubleshooting and having mediocre experiences on their connected devices. Instead of bringing the glitchy-PC experience to homes, let’s get it right this time around with something that looks more like electricity. I don’t care if it’s hardware or an app; I just want to be able to flip a switch and have it work.

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Stuart Elby, VP and network architecture & technology chief technologist for Verizon Digital Media Services, laid out how the promise of software-defined networking could make the company’s cost curve match its revenue by cutting down on the need for expensive gear that is costly to buy and even more costly to operate. In a conversation before his presentation, Elby explained how Verizon’s network can view every single packet on the network, but how keeping track of those packets is both a big data problem and expensive from a network management perspective.

For a while already, Verizon has been trying to host as much of its network as possible on commodity boxes, running commodity servers and some Sun boxes at the core of its network and keeping the big, expensive gear from the likes of Juniper and Cisco at the edge of the network. Elby was cagey about how his preference for lower-cost bit delivery might affect Verizon’s big suppliers, especially since he was seated onstage next to David Ward, CTO of Juniper. When Elby said he wasn’t planning on ditching any of the recent Juniper boxes he’s just bought, Ward quipped, “I appreciate that, Stu.”

However, Elby is dealing with his costs exceeding his revenue, which he explained was coming in “a matter of years,” although he didn’t specify how many. The chart above is not limited to Verizon. Nick Mckeowan, an ONF board member and a pioneer of the protocol, said that he has seen charts like that one from other carriers, including Deutsche Telecom. It’s also a topic we at GigaOM have covered many times in the past.

So how exactly does a new protocol help?

OpenFlow is a protocol that allows someone to separate the intelligence inside a switch and router from the hardware itself. The promise of OpenFlow is that operators can create software-defined networks that are programmable. For more on the topic, see this video explaining it or this GigaOM Pro article (sub req’d). For an operator, it could make it far easier to direct the packets flowing around their networks because they could have more freedom and flexibility in programming their networks to do whatever the operator wanted.

Elby, for example, proposed several use cases, including traffic steering, which involves understanding what service a packet represented and what the subscriber’s plan was and then shunting that traffic over to the most appropriate path. This might mean recognizing that a succession of packets coming from Netflix is a streaming movie, so it could be sent on its way without further investigation, or it could eventually be a way to manage heterogeneous networks.

Another example comes form the data center world, which Verizon doubled down on when it bought Terremark this year for $1.4 billion. Elby describes a scenario where a customes trying to send huge files from one data center to another could guarantee their delivery by upping their bandwidth capacity on demand as opposed to paying for a consistent connection. In this way, Verizon begins to deliver capacity as a service in a manner similar to how Amazon delivers compute as a service.

Elby described more options, but the message underlying his talk was that OpenFlow and software-defined networks could lower Verizon’s costs, but it also turns Verizon into a service provider with a change in the type of cost model it will have. Understanding the technology as Verizon implements it and how it will change its spending on equipment and operating its network is one thing. Understanding the new business models that Verizon can implement as it provides what can become a multi-tenant, shared network model even for enterprise clients is another. It’s going to be fun, but I’m not sure if it will actually result in a lower mobile phone bill.

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Stephen Herrod - CTO, VMware at Mobilize 2011

VMware has signed deals with Verizon and Telefonica to offer its mobile virtualization products on phones provided by the operators. The net result of this deal is that employees who want to combine their work phone and their personal phone will soon be able to do so with the aid of the VMware Horizon software on their phones.

As is usual when dealing with mobile operators and corporate IT, some caveats apply. So far only Android devices will work with the Horizon hypervisor with VMware unable to offer the benefits of a hypervisor-enabled virtualization on Apple’s iOS devices including the iPad and iPhone for Verizon. Steve Herrod, the CTO of VMware, said in an interview that’s he’s happy to do it when Apple decided to let others play around with its operating system. Meanwhile he reiterated that eventually he hopes to get VMware’s Horizon product written into the Android code.

While he’s thinking big, he also avoided stealing the carriers’ thunder. So he couldn’t tell me when Verizon or Telefonica would launch the dual-mode devices, or much about how they planned to price it or sell it. He did say that Telefonica planned to offer it as a service for corporate clients, which means that Telefonica will host the management software that will control the access to the corporate side of the phone and offer it as a service for enterprise clients. Telefonica will also be offering two phone numbers for one phone, although Verizon will not.

So far Verizon will offer the service on LG phones, although VMware also has a partnership to put its hypervisor on Samsung devices as well. When asked, Herrod said he expected more partners to be announced before carriers actually launch the service. The hypervisor has to be put onto the devices before they ship from the manufacturer, although a user doesn’t have to enable it. For more on the use cases associated with having a virtualized mobile phone, check out the conversation I had with Herrod during Mobilize.

Essentially it gives the user one device, while giving the corporate bosses a sense of control and security around what apps, data and information can be accessed and stored on the device. Herrod claims that the software has “minimal, if any” impact on the phone’s battery life or responsiveness.

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It’s no coincidence that Verizon has filed in the very conservative D.C. Appeals court, which has previously struck down FCC rulings, and sees the FCC’s power as limited when it comes to network neutrality. It’s also no coincidence that Verizon’s lawyer in this case, Helgi Walker of Wiley Rein LLP, is the same lawyer who argued for Comcast in the ruling that called the FCC’s authority on network neutrality and even broadband services into question. Other interest groups or companies will likely file lawsuits in friendlier courts in California or other areas of the country where the judges are more likely to rule in favor of the FCC.

Of course, every case is different, and there’s no guarantee any judge, even one inclined to be more conservative, will strike down the rules enacted by the FCC in this case. However, thanks to a ruling in April 2010 by that same court, the FCC has been treading on thin legal authority with regard to enacting rules that govern how applications are sent over networks. I explained the issue in depth here, and in a GigaOM Pro report (sub req’d). For technology firms and companies that are relying on an Internet unencumbered by ISPs messing with packets on their networks, this is not a good beginning to the lawsuit.

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But in a world of schisms, few arguments are as vicious as those around network neutrality. Telecoms firms around the world have spent millions lobbying lawmakers and arguing that they deserve the right to meddle with bandwidth-hungry services. Content providers and open Internet advocates, on the other hand, say this unfairly punishes successful Web companies and promotes monopolistic behavior among broadband providers.

Both sides have been locked in battle for years, but the fight often comes down to a series of he-said, she-said battles based on assumptions rather than facts. A new report published today in the U.K, however, has tackled many of the arguments head on — and it has come to a forceful conclusion.

In a paper titled “The open internet – a platform for growth”, London-based consultancy Plum says that many of the arguments put forward by telcos are “myths”. And far from bandwidth-heavy services being problematic for broadband providers, it says, the reality is that actually require services in order to keep growing — which means network neutrality is vital.

Some network access providers have claimed that the open internet model should now be changed.

They argue that growing demand for content and applications is a problem… We conclude that there is no reason to believe that a
departure from the open internet norm would be economically efficient – rather, we find a departure from this model would risk irreversible harm.

The conclusion is, perhaps, unsurprising — particularly given that the report was commissioned by a consortium of content and software companies: the BBC and Channel 4 (traditional broadcasters with heavy interests in online video), video-on-demand company Blinkbox, as well as Yahoo and Skype.

But its findings are backed up with numbers. Residential service providers voice concerns that too much data is being used by customers, putting them in a dangerous position — but the reality is that the broadband industry across Europe is worth €155 billion, and that value is growing as broadband demand increases. Indeed, while fixed-line providers complain about data use, mobile networks say data is an important revenue driver for them.

Can these both be true? Not really, the report suggests. For fixed-line providers, the cost of delivering increasing traffic is only one small part of the whole picture and is often wildly misrepresented. In mobile, meanwhile, increased traffic has a more direct impact on costs — and yet the income generated still outstrips the money spent by the provider. “Costs are not ballooning,” it concludes.

The report also takes that another common argument — that applications and services are parasites which profit from the investment made by telcos — and labels it a canard. Without applications, it says, demand for services would be low and telcos wouldn’t make money. Plus it’s not as if everybody wants to max out people’s connections: in fact, it’s in the best interests of software companies to minimize download speeds to make services better (which is why they invest in their own infrastructure as well as using the existing broadband network).

The report certainly makes for a strong piece of reading, but its provenance means it is likely to be dismissed by telecoms firms as a piece of propaganda — a harum scarum work that invokes the ghost of network discrimination when all telcos really want to do is prevent abuse of their networks. However the report points out that even though European governments have taken some steps towards enshrining network neutrality, there are increasing examples of online discrimination, such as:

• Moves by the UK’s biggest internet provider, BT, which introduced a policy in 2009 that capped many users’ video streaming at a maximum rate of 896 kbps between the hours of 5pm and midnight.
• Restrictions brought in by Orange, a pan-European mobile and Internet provider, to prevent bandwidth being used for “non-Orange based Internet streaming services, voice or video over the Internet, peer to peer filesharing, non-Orange based Internet video.”
• Charges introduced by the British arm of Vodafone, requiring mobile users to pay an extra £15 ($23) each month for the right to use VoIP services.
• Plans by Dutch telco KPN to charge premiums for access to VoIP, video streaming and IM.

These are all incidents that show net neutrality is not just a theoretical battlefield, and requires careful examination from all parties.

It will be interesting to watch this one shake out. In a post on the BBC website, the corporation’s director of strategy, John Tate, argues that it is vital to look at the reality of cause-and-effect, rather than the rhetoric.

The report considers some of the telcos’ main arguments for introducing more traffic management… and says that, in practice, great content from providers such as the BBC drives demand for broadband connectivity, which in turn has driven fixed and mobile broadband revenues of approximately €155 billion in Europe in 2010.

He concludes by saying that Plum’s report “makes a useful contribution to the debate”.

I find that hard to argue with.

Image courtesy of Flickr user alancleaver_2000

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